MarketView for May 13

MarketView

 

Events defining the day's trading activity on Wall Street

 

Lauren Rudd

 

Tuesday, May 13, 2008

 

 

 

 

Summary

 

Stock prices were hit again on Tuesday as the price of crude oil hit another record and underscored concerns over the increasingly distinct possibility that there will be a reemergence of inflation as Federal Reserve chairman Ben Bernanke stated that the financial markets are still troubled. Domestic sweet crude futures settled up $1.57, or 1.3 percent, per barrel at $125.80 after hitting an all-time high of $126.98. Higher oil prices are a negative for stocks because they reduce consumer and business spending on other items.

 

Bernanke said strong demand from financial institutions to borrow from the Fed showed "markets are still far from normal." As a result, the shares of financial companies led declines in the S&P 500 index, with JPMorgan ending the day down $1.76, or 3.73 percent, to close at $45.48. Also weighing on the financial sector was news that an influential Street analyst cut her price targets on the stocks of the largest U.S. investment banks.

 

Crude oil futures were sharply higher after Iran said it was considering cutting oil production and several Federal Reserve officials highlighted the growing threat of inflation in speeches throughout the session.

 

A rise in the price of Yahoo on news that Carl Icahn is considering launching a proxy fight for the Internet company after takeover talks between Yahoo and Microsoft failed helped out the NASDAQ, which is heavily weighted towards technology stocks. Yahoo saw its share price end the day up $1.30, or 5.15 percent, to close at $26.56.

 

Nonetheless, Hewlett-Packard dragged on the Dow and S&P 500 as it struck a deal to buy Electronic Data Systems for $12.6 billion. Some on Wall Street believe that Hewlett-Packard is paying too rich a premium for a slow-growing business. Hewlett-Packard ended the day down $2.56, or 5.47 percent, to close at $44.27, while Electronic Data Systems shares ended the day up 26 cents, or 1.08 percent, to close at $24.34.

 

Shares of Apple were up $1.80, or 0.96 percent, to close at $189.96, which also helped to bolster the NASDAQ. Apple said its iTunes online store will begin selling HBO cable network shows.

 

Wal-Mart posted stronger-than-expected earnings but indicated results for the current quarter could have trouble hitting Wall Street's estimates as customers struggle. Wal-Mart's shares close down $, or 2.4 percent, at $56.65. The retailer's outlook contrasted with data showing a surprising rise in retail sales last month when auto sales are excluded. But including auto purchases, retail sales fell last month.

 

In other economic news, a survey released by the Federal Reserve Bank of Philadelphia showed the economy will barely grow in the second quarter after sluggish growth early in the year, while inflation is expected to rise. The National Association of Realtors said the median value of existing single-family home sales in metropolitan areas fell 7.7 percent in the first quarter from a year ago.

 

We Still Have Problems Ahead Bernanke Says

 

Federal Reserve Chairman Ben Bernanke said on Tuesday the credit crisis was not over, even as his colleagues revealed growing concerns about inflation that could signal a pause in interest rate cuts.

 

"Conditions in financial markets are still far from normal," Bernanke said. "Ultimately, market participants themselves must address the fundamental sources of financial strains. This process is likely to take some time."

 

Bernanke acknowledged that intervention risked a moral hazard that investors would renew risky behavior in the expectation of being protected by the central bank. But he said regulation ahead of a crisis was the best way to address that risk.

 

A string of other Fed officials in separate speeches seemed increasingly worried that rising energy costs would put upward pressure on inflation, potentially dampening their fervor to cut rates further.

 

Dallas Fed President Richard Fisher spoke to the difficulty faced by the central bank, saying a slower U.S. economy would not necessarily bring down commodity costs.

 

"There still is growth in the world economy, even if we slow down," Fisher said. "It's difficult for me to see a supply response that will feed into that demand to relieve all the price pressures we see on oil."

 

Like Bernanke, Fisher noted some improvements in market conditions but said the financial sector was "not out of the woods yet."

 

Separately, the Cleveland Fed's Sandra Pianalto said that although core U.S. price measures were climbing faster than she wanted, Fed monetary policy was compatible with low inflation.

 

The comments highlighted the Fed's ongoing predicament: It must prevent economic growth from slumping too deeply even as it grapples with price pressures that are largely out of its control.

 

Bonds sold off sharply following the comments and rate future markets began pricing in strong prospects for higher interest rates by year-end. Stocks improved on the comments, with the Dow Jones industrial average and the S&P 500 reducing their red ink, while the NASDAQ moved into positive territory.

 

Oil prices continue to set new records, and were trading above $125 a barrel on Tuesday, after earlier setting another record high near $127. Such steep increases have erased at least one full percentage point from economic growth, according to Thomas Hoenig, president of the Kansas City Fed. Hoenig said the economy faced a difficult set of circumstances because of high oil prices, the housing downturn and subsequent credit contraction, but growth should pick up later this year.

 

Fisher, who has dissented against the Fed's more aggressive rate-cutting efforts, said predictions of a very deep recession were misguided. "I'm not sure how deep the economic slowdown will be," he said at a community event in Midland, Texas, even as he admitted the softness could linger for some time.

 

A Philadelphia Fed survey of professional economists seemed to counter that optimism, however, finding that the chances of an outright contraction in gross domestic product have risen.

 

Keep in mind that the string of speeches on inflation could signal the Fed's intention to leave rates on hold from here on out.

 

Retail Sales OK Without Cars

 

The Commerce Department reported on Tuesday that retail sales, excluding cars, were surprisingly strong in April, showing consumers are still willing to spend despite rising food and energy costs. Rapidly rising gasoline prices have pinched consumers' pocketbooks and reduced their interest in new cars. Auto dealers suffered a 2.8 percent drop in sales during April, adding to the 0.5 percent decline posted in March. Gasoline stations reported a 0.4 percent decline in April sales after a 1.6 percent rise in March.

 

The report echoed recent data implying underlying economic durability, including fewer job losses in April than feared and a surprisingly strong pace of first-quarter productivity that buoys hope for corporate profits. The retail sales numbers might increase the possibility that the Fed will pause its rate-cutting campaign and focus more closely on controlling inflation.

 

The Commerce Department said retail sales declined 0.2 percent, but excluding cars, sales rose 0.5 percent. The hope is that consumer spending will cushion an economic slowdown and offset the dampening impact of falling housing prices, particularly with an added boost coming from government rebate checks being sent to about 130 million taxpayers under a stimulus plan.

 

The economy is forecast to grow at a scant 0.2 percent annual rate in the second quarter, slowing from the anemic 0.6 percent growth rate in the previous two quarters, according to a survey of economists released by the Philadelphia Federal Reserve Bank on Tuesday. Nonetheless, many economists believe a recession is all but certain, although the recent string of stronger-than-expected data has strengthened the hands of those who argue otherwise.

 

The retail sales data boosted the dollar's value by supporting a view the U.S. Federal Reserve may keep official interest rates on hold. But Treasury debt prices, which tend to benefit from lower rates, lost ground. Stock prices were whipsawed throughout the trading session, initially buoyed by the retail sales data, but suffering in later trade after a bevy of Fed speakers warned that markets remained unsettled and inflation was still a threat.

 

Other data highlighted the squeeze on consumers, who have been caught between soaring food and energy prices and a crumbling housing market. The Labor Department said U.S. import prices climbed 1.8 percent in April as prices for petroleum and non-petroleum products climbed, feeding worries about the potential for inflation. Import prices have jumped 15.4 percent over the past year, the biggest 12-month gain since the government began publishing the data more than a quarter century ago.

 

Separately, the National Association of Realtors said median values of previously owned single-family homes in metropolitan areas fell 7.7 percent from year-ago levels. In April, sales of building materials gained 1.9 percent, more than reversing a drop in March, while general merchandise store sales rose 0.5 percent.

 

The new level of cost consciousness turned up in operating results for Wal-Mart, which rose 7 percent in the quarter ended April 30. Wal-Mart noted that its customers were seeking bargains on necessities such as food and were straining from paycheck to paycheck.

 

Lower Profits at Whole Foods

 

Whole Foods Market on Tuesday posted lower quarterly net profit, as it booked charges related to its $565 million acquisition of rival Wild Oats Markets in August. Despite a 28 percent rise in sales during the quarter, the chain left its fiscal 2008 sales outlook unchanged, and shares fell 8.6 percent in after-hours trade.

 

The company had fiscal second-quarter net income of $40.0 million, or 29 cents per share, compared with its year-earlier net income of $46.0 million, or 33 cents per share. Charges related to its Wild Oats acquisition lowered earnings by about 6 cents per share, Whole Foods said.

 

Revenue rose nearly 28 percent in the quarter to $1.9 billion, matching Wall Street estimates, on average, while sales at established stores rose nearly 7 percent. Sales from Wild Oats stores contributed some 9 percent of total sales.

 

Same store sales, excluding four relocated stores and two major expansions, rose 5 percent, the company said. The company reiterated a fiscal 2008 outlook it gave in February of total sales growth of 25 to 30 percent, and same-store sales growth of 7.5 to 9.5 percent.

 

Whole Foods' outlook for the year implies revenue between $8.2 billion and $8.6. The company said it does not expect to produce operating leverage in fiscal 2008, due in part to more labor and benefits from Wild Oats stores.

 

Whole Foods shares lost 8.6 percent, to close at $30.74 in after hours trading. The shares had closed in regular trading down 11 cents, or 0.33 percent, at $33.64.